11.07.2018

Law on privatization of state property in Ukraine – what it means for investors

Law of Ukraine No 2269-VIII On privatization of the state and communal assets came into force March 6th.

What are the reasons and key aims of the law?

In tote, Ukraine owns almost 4 thousand enterprises. Majority of them are not strategic for the country and, as a result du to inappropriate approach, lack of resources to carry out proper refurbishment, are unprofitable, destructed and depreciated. Other than that, poor management and control lead to corruption in the field.

Transparent privatization regulated by updated law and further regulations give an opportunity for the investors to purchase assets and revive the production using technologies and know-how.

Who is in charge of privatization in Ukraine?

The state policy in the field of privatization is served by State Property Fund of Ukraine, its regional chambers and representative offices headed by Vitaliy Trubarov.

Adress of the head office:

01133, Kyiv, 18/9 General Almazov str. (`Pecherska` Metro Station)
Fax: +38 (044) 286-79-85

Privatisation may be initiated by privatization authorities, management authorities of relevant state-owned companies, or potential purchasers.

What type of property can be purchased?

According to the law among the property/objects of privatization are

  • property of enterprises, workshops, plants, and other departments which are integral property compounds, if in case of their spin-off in independent enterprises technological integrity of major production enterprise, thereof it is separated, is not broken;
  • projects under construction or projects put on hold;
  • shares of the property owned by the state under management of business associations and other unions.

What are differences between objects of large privatization and objects of small privatization?

All objects will be divided into two groups – objects of large privatization and objects of small privatization.

Objects of large privatization are single property complexes owned by state and communal enterprises, as well as stock of shares of joint-stock companies, where 50% of shares are owned by the state and the asset value of which exceeds 250 mln UAH according to the financial report for the last year.

Meanwhile, objects under construction, frozen projects, social and cultural objects such as hospitals, boarding houses, homes for the elderly and people with disabilities, kindergartens, children’s camps, cultural and amateur sports facilities are classified as small privatization.

How large projects of privatization can be purchased?

Large privatization objects will be prepared for privatization by investment advisors, e.g., the world largest investment banks, selected at a transparent tender by independent members of auction committees. The main selection criteria include (a) ability to subcontract other consultants, (b) competence (qualification, experience, skills and knowledge), (c) advisor’s methodology and strategy for preparation to privatization, and (d) advisor’s proposed timeline. The investment advisor must (a) collect and analyze object’s economic, technical, financial data, (b) adjust main accounting positions in line with the accounting standards, (c) conduct audit, (d) prepare financial model and determine investment interest to the object, possible ways to enhance it and restructure debt, (e) prepare recommendation regarding basic prices and tariffs for products and services of the object, its marketing policies, (f) prepare an information package regarding privatization object, (g) suggest starting purchase price, (h) prepare documents reflecting antitrust and ecological requirements, (i) search for potential investors. Investment advisor may not act as an investor in the relevant privatisation auction. Advisor’s fee may include a fixed fee and success fee (in case of the implemented sale) as certain percentage of the purchase price according to the procedure approved by the Cabinet of Ministers. The advisor’s fee may be paid from the state budget and/or funds of international organisations.

If there is no interest from potential advisors to participate in the selection, then privatization is conducted without advisor’s assistance and the staring price is established by the auction committee based on the value determined according to methodology approved by the Cabinet of Ministers.

How can non-residents participate in the auction to purchase large objects of privatization?

To be admitted to an auction for a large privatization object a non-resident bidder must submit (a) evidence of guaranty deposit paid from the account in a Ukrainian or foreign bank (except for the bank from a country listed by FATF as not cooperating in fighting money laundering) in the amount of 5% (decreased from 5-20% in the old law) of the starting purchase price or the irrevocable banking guaranty, (b) evidence of payment of registration fee, (c) bidder’s consent to be committed to the privatization terms, (d)  registration document and information about ultimate beneficial owner (or relevant explanation in case of no beneficiary owner) and the most recent annual or quarterly financial report (for legal entities), and copy of passport and evidence of financial status and income issued by a country of citizenship or tax residence (for natural persons).

Where and how small objects of privatization can be purchased?

Small privatization objects may be sold only through an electronic auction system (such as PROZORRO) thus lowering the corruption risks. The starting price for small privatization objects must equal the balance sheet value of their assets less liabilities, but not less than UAH 1. If it is not possible to establish the balance sheet value of assets, then the starting price will be determined based on the appraisal of assets by the methodology approved by the Cabinet of Ministers.  The auction committee administering the sale is appointed by the State Property Fund. The electronic auction is held not later than 35 days following publication of its announcement. It is qualified as properly held if there are at least two bidders (except for Dutch auctions) and if there is at least one round of the increase of the price. In case of a single bidder privatization authority takes a decision to sell the object to the bidder for the bidder’s price (redemption), which may not be less than the starting price. If the first auction is not held or there is no redemption, there should be a second one with the 50% decrease of the starting price. The single bidder rule fully applies to the second auction as well. If the second auction fails, the Dutch auction is to be held starting with the price, which is 50% of the initial starting price.

How do non-residents pay for the objects?

Non-resident purchasers may pay for the privatization objects in hard currency or UAH.

Where to find list of all assets for privatization?

Who is eligible to purchase state property under the law?

  • Local and foreign investors directly.
  • Brokers in the interests of their clients. The broker must disclose information about a client required for the purchasers, as well as a copy of its contract with the client.

Who is not eligible to purchase property under the law?

  • Legal entities that own property (assets) with at least 25% share owned by the state;
  • State authorities;
  • Employees of the state institutions related to the privatization.

How much time needed for privatization?

In addition, the bill reduces the terms of privatization. In particular, it cancels pre-privatization preparation, does not contain norms on the development and approval of privatization plans, the creation of a privatization commission, and so on.
According to Trubarov, the term of large privatization will be reduced from 24 months to 12, and for small – from 9-12 months to 4-5.

How investor will be protected under the new law? 

Investors will get better terms at the initial post-privatisation stage. In particular, there may be no bankruptcy proceedings during the first year following privatization. This will allow settlement of old debts without the risk of losing business to creditors. The statute of limitations for claims on invalidation of privatization results is limited to 3 years thus lowering the risk of raiders’ attacks.

Privatisation sale-and-purchase agreement may be governed now by foreign law (e.g., English law) and privatisation disputes between investors and the state may be taken to foreign arbitration (if parties did not agree on the site of the forum it must be under the Rules of Arbitration Institute of the Stockholm Chamber of Commerce). Under the new law, until 1 January 2021 and based on proposals of potential purchasers to the draft sale-and-purchase agreements regarding large privatisation objects privatisation authorities may determine that this agreement shall be governed by English law except for the transfer-of-title provisions which are subject to imperative Ukrainian regulation and the Law of Ukraine on Private International Law. Privatisation sale-and-purchase agreement (except for unfinished constructions) does not need to be notarised.

Law available here: 

http://zakon0.rada.gov.ua/laws/anot/en/2163-12

Sources: Asters, State Property Fund of Ukraine, Verkhovna Rada of Ukraine

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